My Comments: The baby boom generation is going to be hit hard by this phenomena, and most of us know it. We just aren’t sure how to deal with it. This is not a solution but a needed reminder that pretending it will go away is not likely. While I disagree with their conclusion about hybrid products, it’s a good article.
by Miriam Rozen / SEP 2, 2014
Just when financial planners imagined long-term care coverage discussions couldn’t get any knottier, they managed to do so.
Long-term care insurance has prompted groans since the product’s inception in the late 1970s, taking black eyes from broad mispricings and the exits of big players like Prudential Financial.
Now three unwelcome new trends have surfaced: long-term care premiums have gotten even more expensive, benefits have shrunk, and cost of living adjustments have done the same — with the latter dropping to 3% from 5% annually, or, in some cases, withering away to nothing.
But planners might welcome other emerging trends in the long-term care insurance industry — including revised pricing and product packaging targeted at the middle market, rather than just high-net-worth clients. Those new developments emphasize portfolio protection and partial, rather than comprehensive, long-term care coverage.
While some of the changes have increased plan flexibility, expanding the types of long-term care benefits that insurers will pay, the complexity in plans’ structures has amped up, as well. A financial planner could easily lose many productive workdays reviewing the wide variety of (usually expensive) provisions for inflation protection and other riders.
Availability is an issue, too: Some financial planners grimly recall recent calls to clients, warning that they only have a week to enroll for a policy because it’s about to be pulled off the shelf. (Existing policyholders usually have more time and warning before the price hikes announced by renewal notices become effective.)
To get the biggest bang for their clients’ buck, financial planners must therefore still focus on the granular distinctions between policy bells and whistles.
“It’s impossible. The fact is that insurance companies are losing money on long-term care insurance because people are starting to use it,” says Lynn Ferraina, a partner at Ciccarelli Advisory Services in Naples, Fla., who has been advising about long-term care insurance for two decades.
“The insurance companies are starting to pay out and they are realizing the costs and that’s why they are increasing the premiums for others,” Ferraina adds. “I think it’s a national dilemma.”
“We stay educated. We go to a lot of conferences,” says Donald Haisman, an advisor in Fort Myers, Fla., who says he has offered long-term care insurance to clients for decades.
When the products first became available in the 1970s, dozens of insurance companies jumped into the market — and most coverage paid only for traditional nursing-home stays.
These days, only a few major providers — Genworth, New York Life, John Hancock and Transamerica Financial — remain in the business. But the products they offer now cover a wide range of needs for the elderly and infirm, including nursing homes, assisted living and home care services.
For help navigating the specialized area, Haisman hires — on an hourly basis — Roger Macaione, a certified financial planner who focuses on long-term care policies. Macaione receives no commissions, so he can help clients understand what they need rather than pushing product, Haisman says.
Indeed, no financial planner can afford to ignore the new developments in long-term care insurance.
1. PRICE INCREASES
Long-term care insurance providers recently introduced yet another round of prices increases, along with gender-based premium pricing. That means everyone should expect to pay considerably more for less — but particularly women.
Prices vary by location: Floridians can expect some of the highest increases; New Yorkers some of the lowest. Overall, according to the American Association for Long-Term Care Insurance, premiums have risen on average 4.8% in the past two years.
“How much higher can pricing go? I don’t know,” says Rachelle Kulback, who helps the planners at Schneider Downs Wealth Management Advisors in Pittsburgh with long-term care questions.
“We’ve had one client who simply chose to cancel,” when faced with a premium increase, says Benjamin Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C.
2. MIDDLE-MARKET OFFERING
Long-term care insurers have started to recognize that their industry has soured its reputation by raising premiums, halting sales of new policies, eliminating attractive options — and, debatably, offering an inherently unappealing product. (After all: Who really wants to think about long-term care?)
Haisman himself recalls that when his own father’s health began deteriorating, he initially took comfort in knowing that his father had paid premiums on a long-term care insurance policy for 25 years. But then reality set in. “The insurer would never pay; they always had a reason not to,” Haisman recalls.
Haisman says he submitted paperwork for his claims — “probably 100 documents” — but “there was always some reason that my father’s costs didn’t meet the criteria, according to the insurer, even when we he was in a hospice. … That’s why we do so much research on long-term care insurance policies for clients.”
Providers have responded to the reputational hit by attempting to simplify the structure and marketing of their products. They’re now promoting their products as a way for middle-class clients to get partial portfolio protection rather than as a total solution for all long-term care needs.
Aaron Ball, a senior vice president for long-term care insurance at Genworth — the provider with the largest share of the nearly $406 million market — says his company in late July introduced a new set of products that offer flexibility in terms of how much insurance coverage consumers buy and how they use it. The new FlexFit products let planners offer clients either budget-friendly premiums, starting as low as $100 a month, or packages priced according to asset-protection goals, starting at $100,000 of assets, he says.
Such products may appeal to advisors who understand how the costs of keeping a parent in long-term care can wipe out savings.
3. HOME CARE COSTS DROPPING
Of course, even $100,000 doesn’t sound like much when nursing home costs in some parts of the nation run as high as $95,000 per year. But providers, including Genworth’s Ball, stress that their products cover home care, and that typically costs much less — about $45,000 a year, on average.
As it turns out, home care services are what more than 70% of Genworth’s long-term care claimants seek.
And home care costs may be expected to drop even further, says Dallas advisor Suzanne Fitzgerald, who markets New York Life’s long-term care products. She cites two key reasons: Competition is increasing, as more companies enter the growing business, and technological advancements — such as wireless monitoring, automated pharmaceutical deliveries, and even the Uber app — are making some home care services less expensive to provide.
“There are so many home care providers now and most of my clients want in-home care,” she says. According to the AALTCI, which keeps industrywide statistics, home care claims accounted for 51% of those opened under long-term care policies in 2012, the most recent year of figures available.
Both Genworth and New York Life have attempted to make the home care services options even more attractive for their claimants by providing care coordinators — counselors who help families arrange for home care services in their own communities. Both insurers accelerate coverage (by eliminating waiting periods) for families who rely on those home care-coordinating professionals.
“We have experts in every region of the country. They know who is good and bad,” among home care providers, says Fitzgerald.
4. SPOUSAL SHARING
While long-term care riders can be complex and expensive, one subset should be particularly worthy of any financial advisor’s attention, says Nancy Skeans, managing director at Schneider Downs Wealth Management: spousal-sharing riders.
These new products, which emerged about two years ago, allow a couple to buy a designated number of years’ coverage — and then permit either spouse to use any of those years.
Since statistics show that long-term care needs rarely exceed three years, the spousal-sharing option makes economic sense, Skeans says: For one price, a couple gains good odds of having coverage for all their needs.
“Each person is buying two years of protection at least, but it is much less expensive than having their own policies,” Skeans says.
5. DISAPPEARING OPTIONS
Another way providers have been countering the high cost of coverage is to reduce or eliminate options once seen as advantageous to purchasers.
One virtually extinct provision that was once common is the “refund of premium” benefit. If the insured died before a certain age, this provision would have paid heirs all the premium payments that the client had made, minus any benefits already paid against the policy.
Inflation provisions, too, were once a way for financial planners to help clients effectively customize plans for their needs and budgets. But most LTC carriers no longer offer what had once been an industry standard: 5% compound inflation protection.
Genworth’s new products, for instance, allow a 2% compound inflation option. And New York Life’s policies, offered in partnership with a Florida state program, no longer require compounded inflation protection for policyholders age 61 or older.
Birken, for one, thinks some clients may benefit from the reduced inflation protection — because those missing options make long-term care premiums more manageable. “The difference in cost for an inflation rider can make or break” a policy’s affordability for the client, he says.
Birken downplays the benefits of another long-term care funding alternative: hybrids. These combination products — which combine life insurance with long-term care riders — appeal to some financial advisors because they represent an easier sale; life insurance is something clients already understand.
And the hybrids form a growing part of the market, according Genworth’s Ball, whose company sold about $100 million in the products last year.
For Birken and others, though, the hybrids represent a second-rate alternative. Why? They typically offer no inflation protection and less valuable benefits than traditional long-term care insurance, he says.
Because the underwriters’ qualifying requirements are frequently “less stringent,” Birken says, “it makes them an opportunity for some folks.”
However, he adds: “We would never go with a hybrid first.”